Kroger set to place warehouse order with partner Ocado

LONDON (Reuters) - U.S. supermarket chain Kroger Co (KR.N) is expected to order the first three of 20 high-tech warehouses from online grocer Ocado (OCDO.L) by the end of the year under the terms of a breakthrough deal agreed in May.

Through the deal with its largest partner, Ocado will ratchet up its delivery business by building robotically operated warehouses for Kroger in the United States, raising the stakes in the battle with Amazon.com Inc (AMZN.O).

The Kroger deal is Ocado’s biggest yet, exceeding all of the warehouses the firm has built or plans to build with Morrisons (MRW.L) in Britain, Casino (CASP.PA) in France, Sobeys (EMPa.TO) in Canada and ICA Group (ICAA.ST) in Sweden.

Ocado said the detailed agreement sets out the key parameters for its working relationship with Kroger.

It includes how Kroger will order warehouses, or what Ocado calls Customer Fulfilment Centres (CFCs), and the basis on which Ocado will develop and operate those sites in the United States. Kroger is expected to order 20 CFCs over the first three years of the agreement.

Ocado shares rose as much as 6 percent on Tuesday, taking gains over the last year to 195 percent.

The UK firm did not disclose the location of the first three sites but said details will be made public by Kroger in several weeks.

The target is for Kroger’s CFCs to go live within approximately two years of each order being placed.

Ocado said the terms and fee structure of the Kroger deal are similar to those for its other transactions to-date combining up-front fees and ongoing capacity fees. It did not disclose figures.

Bernstein analyst Bruno Monteyne said he is assuming that Ocado will spend 30 million pounds per CFC, with Kroger paying a capacity fee of 3.5 percent.

Ocado expects the peak cumulative net capital outflow of the initial three CFCs to be 90 million pounds - well within its financing headroom of over 500 million pounds.

As with previous deals, Ocado has agreed to install and maintain modules of Mechanical Handling Equipment (MHE) sufficient to provide an agreed level of processing.

The first CFCs ordered in 2018 will have funding requirements similar to earlier deals. However, Ocado and Kroger are still discussing how future CFCs will be funded.

Analysts said Kroger could take on a bigger part of the capital expenditure outlay in return for keeping a bigger share of the future food retail profits.